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Where Are Advertisers? At the Movies

Those on-screen ads before the movie bring in big bucks for National Cinemedia and other movie-ad sellers

This year has been characterized by advertisers slamming the brakes on spending across virtually all online and offline media. Yet even within this scarred landscape, there are thriving patches of grass. I guarantee, though, that you cannot guess what's built a strong case for being a media business darling of 2009 thus far. No, not Amazon.com (AMZN).

No, not Google (GOOG). No, not a badly beat down media conglomerate briefly rallying itself off the canvas. It is a company that last year made around 90% of its revenue from advertising—and not a penny of that came from the Internet.

National CineMedia (NCMI) is the biggest U.S. movie theater advertising company. That is, it produces programming for theaters that shoehorn ads into the space between the time you take your seat and the start of the coming attractions. The company, which places ads from big-name national advertisers such as Ford (F), Sprint (S), and Holiday Inn on nearly 17,000 screens, went public in February 2007. Cinema chains AMC Entertainment, Cinemark Holdings (CNK), and Regal Entertainment Group (RGC) collectively own more than half of the company. Last year its revenues were $330.3 million. Its stock had a 53% run-up this year through early May, before retreating from its peaks. "Across most media, '09 is going to be a down year," says CineMedia Chairman and CEO Kurt Hall. "We are in one of the fortunate areas that is new and growing." This despite his correct assessment in a company earnings call on May 12 that "the supply-demand reality is now favoring media buyers"—advertisers—and not media owners. (And the company's stock was hammered the day after its earnings call, owing to concerns over lowering its second-quarter outlook, despite affirming, if cautiously, its previous full-year expectations.) It may be a stretch to say that cinema ads are the new Internet ads, but suddenly it appears there is a kind of traditional media—or at least semi-traditional media—that Wall Street likes.

Ads long ago leached into the moviegoing experience, a fact that rankles many old and grumpy cinephiles. (I know, because I'm one of them.) But these ads appeal to many other constituencies for the same reasons that make movieheads grit their teeth: Viewers are alone in the dark with a massive and all-but-unignorable ad message spread out on a sailboat-sized screen. "The mindset of people watching movies is much different than the mindset of people watching TV," says Tim Chaney, director of advertising at Kia Motors America, which just concluded a cinema advertising campaign for its new Soul subcompact. "TV becomes a lot of background noise." At the movies, "you've got people in a more relaxed frame of mind, coming to be entertained." And audience resistance to movie ads has steadily declined, he says.

Movie ads also let advertisers play with longer spots, as Kia did with its recent minute-long ad for its Soul hatchback starring, uh, Soul-driving hamsters. (A 30-second version of the clip now airs on TV.) Cinema advertising is a much smaller and less established precinct than the TV version—last year advertisers spent just over $908 million in cinemas, according to Barclays Capital, and more than $70 billion on TV. But Chaney says all those screens can deliver audiences that rival those once only delivered by good old TV: Kia's cinema ad deals, with National CineMedia and its competitor Screenvision, guaranteed the carmaker that 60 million people would see its ad over the course of one month.

NO FAST-FORWARD, NO MUTE

There's also a brute fact about this business. "Cinema is one of the only places where the consumer can't make [an ad] go away," says Hall. And, saysanalyst James Marsh of investment banker Piper Jaffray, movies also attract a younger audience "that TV has had difficulty reaching." (One of National CineMedia's top ad categories is the U.S. military, which obviously is only concerned with reaching young men and women.) And a healthier-than-expected year for movies, with box office attendance and revenue both up in the double digits, means that in many cases cinema ad firms are "overdelivering"—more people are seeing the ads than the advertisers paid for, says Marsh. (This is not a claim many TV networks can make.) The company also gets around 85% of its ad revenue from national advertisers, which have fared better this downturn than their hard-hit local counterparts.

If TV networks continue to command premiums for shrinking audiences because of a scarcity of inventory—there are only so many spots available on American Idol, after all—it's a game cinemas can play, too. Movie houses still keep ads to a (relative) minimum, which, analysts say, also works in their favor. And one simple reality doesn't hurt either: If you believe, as I do, that one reason marketers stick with television is because they love to imagine their product starring on TV—well, then, isn't it even better if their products become movie stars?

One factor bolstering Wall Street's confidence in National CineMedia is this year's strong box office performance. But Steve Birenberg, founder of Northlake Capital Management, warns investors in a blog post that comparisons to the 2008 box office will get tougher, as movies last year gained momentum later, and the sector's stock prices may suffer. Might National CineMedia's suffer then, too?